[beaker]

The funny thing is that folks who are deeply underwater on their mortgages are _already_ screwed with regards to credit - even if they have a good credit history and are up to date on all payments. I know someone who has high 700s credit score that was recently turned down for a credit card, the reason given was that the balance on their mortgage was too high. That was the straw that broke the camel's back for them and they have decided to do a short sale on their property.

[ryanwaggoner]

That makes no sense. Being underwater doesn't mean that your mortgage balance is too high, it means that it's higher than the value of the house. A credit card company would have no way of knowing the value of the house unless they had an appraisal done. What they likely meant was that either the balance or the monthly payment (or both) was too high for his income.

[beaker]

I understand what "being underwater" means - thanks though. The facts are that the credit card companies don't need to do an appraisal - the entire market where this person lives is down 50% from the time they took out the mortgage. The person maintains a good income and can easily pay the mortgage payment, it just doesn't make sense any more for them to throw good money after bad to hold on to a FICO score that really doesn't get them credit any more.

[ryanwaggoner]

Again, you're not making any sense. Let's say the mortgage that the person has is for $250,000. How does the fact that my market has supposedly lost 50% now mean that my mortgage is "too high"? Perhaps the house was worth $1m when I bought it and is now only worth $500k. Would the credit card company still think the mortgage is "too high"? It's still only 50% of the value of the house. I think you're missing some data.

[beaker]

It makes sense because the borrower has gone from having a positive net worth to a negative net worth due to the mortgage being underwater.

When they took out the mortgage, they were debt-free and had a mortgage equal to the value of their assets (the 1 million dollar house balances out the 1 million dollar loan), giving them a net worth of essentially $0. Now the house is worth $500,000 (but they still owe $1,000,000), so their net worth is essentially -$500,000.

Under these circumstances, it makes sense that the credit card company doesn't want to issue a card to someone that they know is worth negative a half million dollars, even if he did pay all his bills on time and can make the monthly payment on the amount he owes.

[ryanwaggoner]

How does the credit card company know he's underwater?

[beaker]

From my earlier post : "the entire market where this person lives is down 50% from the time they took out the mortgage".

The building they are in was built in late 2005 in downtown San Diego. It doesn't take an appraisal to know that it's underwater - there are many short sales and foreclosures of identical units that can attest to that fact. If anything it's easier for the credit card company to see the mortgage balance then it is for them to see someone's income as that does not go on the credit report.

It's the _balance_ on their mortgage (the amount they owe, not the amount of the mortgage originally) - that is the problem.

[ghshephard]

Likely the credit card company believes he lives at his billing address, and has done some geo-analysis of credit trends for mortgage holders in his area. Your credit record will indicate when you initiated your mortgage and what the terms were, and it's relatively straightforward to do risk analysis after that.

I've frequently wondered what impact having all my bills sent to Paymybills/Paytrust at Box 14814695, Sioux Falls, South Dakota for the last 10 years has had on my credit profile. :-)